Preview: LVMH investors jittery over anaemic China demand for European designer goods

Vontobel Holding AG

14/10/2024 07:00

By Mimosa Spencer
       PARIS, Oct 14 (Reuters) - Investors in French luxury
group LVMH  LVMH.PA  are eager for signs that China's new fiscal
stimulus measures can finally pull wealthy and middle-class
Chinese shoppers out of their funk, inspiring them to splash out
on $4,300 designer leather handbags ahead of Singles Day,
China's largest annual shopping spree.
    Global luxury bellwether LVMH, whose portfolio spans Louis
Vuitton and Dior fashion and accessories, Tiffany & Co jewellery
and Sephora cosmetics, reports third-quarter revenue on Tuesday.
    Global sales of personal high-end goods - spanning clothing,
accessories and beauty products - this year will be between flat
and 4% higher year-on-year, at constant rates, the consultancy
Bain has previously said. The global slowdown is most marked in
China as economic uncertainty weighs on middle-class shoppers
and makes those who can still afford luxury cautious about
ostentation. 
    LVMH shares, alongside peers Gucci-owner Kering PRTP.PA ,
Hermes HRMS.PA  and Richemont  CFR.S , owner of Cartier, have
been on a roller coaster this year. "The luxury consumer is all
shopped out," said analysts at Bank of America, citing
especially a deterioration in sales to the Chinese, who were the
main growth driver in the first half of the year. 
    Predicting the third-quarter will be the worst for the
sector in four years, with a 1% decline in organic sales
year-on-year, they also lowered estimates for earnings per share
for next year by 17% on average. 
    Markus Hansen, a portfolio manager at Vontobel, which owns
shares of LVMH, Hermes and Richemont, said a "lack of
confidence" among Chinese shoppers persists following declines
in the country's property market. If confidence returns, even
slightly, luxury goods spending in China could become "quite
powerful" again, Hansen said. 
    Analysts are confident that Chinese shoppers will regain
their appetite for high-end fashion at some point, with
Jefferies noting sector forecasts are already counting on a
healthy acceleration in demand from Chinese in 2025. 
   Redoubling its efforts to expand its market share in China,
LVMH recently deepened its partnership with Alibaba  9988.HK  to
leverage the e-commerce firm's cloud and artificial intelligence
capacities. LVMH's travel retail unit, DFS Group, is building a
major shopping and entertainment complex on China's tax-free
Hainan island.
    Luxury goods are unlikely to be the next target of China's
EU trade retaliation. But luxury goods companies are staring at
possible 10% plunges in their China sales this year, compared to
earlier projections of 5% to 6% sales growth, according Patrice
Nordey, CEO of Shanghai-based innovation consultancy Trajectry.
"The growth problem is everywhere, the top end consumers, the
middle class, the Gen Z, travel retail -- there's too many
problems for the brands to solve."
    TD Cowen analysts on Thursday lowered their third quarter
organic sales estimates for LVMH and its rival Kering to 2.9%
and -10.4%, respectively, and for Richemont's second quarter,
which ended in September, to 2%. 
    Kering, which reports sales on Oct. 23, gets a large
proportion of its annual sales from China, primarily through its
powerhouse Gucci brand, with the Asia-Pacific region excluding
Japan accounting for 35% of its revenue. Gucci's recent emphasis
on "timeless" styles and less on trendy new fashions might not
have been effective with shoppers who need exciting looks to
open their wallets, Cowen said.
    
    

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Luxury stocks remain volatile on China concerns    https://tmsnrt.rs/401b7hL
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 (Reporting by Mimosa Spencer, Casey Hall, Elisa Anzolin;
editing by David Evans)
 ((Mimosa.Spencer@thomsonreuters.com;))